To many people, their credit score can be as much of a mystery as the possibility of alien life and whether it exists. However, unlike the universe’s many unsolved secrets, it can be very beneficial to you to know exactly which information about your life and about your finances is used to determine your credit score.
If you know this, then you stand a much better chance at improving your credit score. These are the five big factors that make up your credit score and how payday loan companies & short-term loan companies use that information.
1. Your payment history
For every loan, you’ve taken out and for every credit card account you’ve opened, your lenders send a report each month to credit reference agencies letting them know whether you’ve made your payment on time and in full.
If you do make your payment, you get a tick. If you miss a payment, you get across.
35% of your credit score is based on your payment history not only with finance companies but with household suppliers like utility companies, Sky, broadband suppliers, and more.
If a lender sees a perfect or near-perfect history of paying your bills on time, this works really well in your favour.
2. Your credit history
Your credit history describes the types of credit accounts you have and how long you’ve had them for. A good rule of the thumb is that the more accounts you have which don’t remain open for a long time, that’s going to affect your credit score in a negative way.
How does that work out in real life? Let’s say you have a balance of £5,000 on your credit card and when you took your credit card out, there was 0% interest on the card for 15 months. At the end of the 15 months, you close the account and take the balance to a new provider again with a 0% interest period. Lots of people do this – it is a great way of saving money.
However, some finance companies, particularly credit card providers, will look on that in an unfavourable way because they worry that they’re not going to get the opportunity to make money from your custom.
Your credit history accounts for around 15% of your credit score.
3. How much you owe
30% of your credit score is based on the amount of money that you currently owe to each of your creditors.
Let’s say you have 3 credit cards all with a £5,000 limit on them. If you’re very close to the limit on each credit card, that looks bad because you’re utilising the facilities as much as possible. It suggests that it’s a struggle at the moment holding onto money because you’re deferring a lot of your current financial commitments to a later date.
However, if your 3 credit cards have a £5,000 limit and you’ve spent £2,000 on each on average, this looks much better to a lender because it suggests that you are in control of your finances much more and that you have much less reliance on credit facilities to meet your monthly outgoings.
4. Any other applications
10% of your overall credit score is based on the number of accounts you have recently opened and the number of the account you have recently tried to open. This is then balanced with the amount of credit facilities you normally have historically.
If you apply for lots of loans within a short space of time, that’s reflected in your credit score and it looks bad to lenders.
Why? Sadly, some people find themselves in what’s called a “debt spiral” when they end up borrowing more and more money to repay their previous loans. This spiral may have started from a simple unexpected expense, like needing to borrow money to fix their car.
When people get into a debt spiral, that means that they’ve got themselves into a difficult financial situation and they may have trouble meeting repayments on their existing loans. And to avoid missing a repayment deadline, that person takes out another loan. At some point, the number of loans taken out and the repayments that need to be made on them become too much and the whole situation becomes unaffordable and unmanageable.
5. The type(s) of credit
Making up the last 10% of your credit score is a score based on the type of credit accounts you currently have.
They look at two things – your “instalment” debt and your “revolving” debt.
Instalment debt is financial products like mortgages or personal loans. They’re a real financial commitment for a person because the repayments a borrower has to make often span many years, sometimes a decade or more. This shows a lender how well you can manage a sizable and ongoing commitment.
Revolving debt is financed products like credit cards. Some lenders are more concerned about revolving debt than they are about instalment debt because they believe that it’s a better indicator of how someone manages their money.
How do payday loan companies and short-term loan companies use a credit score?
Pretty much like any other lender – they use your credit score as part of their decision-making process on whether they say “yes” or “no” to your application.
It’s not just your credit score they consider though. They also look at the details you provided them with when you made your application to see if your personal circumstances meet their criteria for lending money.
There is a difference though. High Street banks and building societies tend only to lend money to people with very high credit scores. Payday loan and short-term loan companies are different though – they’re much more bothered about the person you are today and your personal situation today than they are about how things were for you a few years ago.
Payday loan companies and short-term loan companies are much happier to work with people who have less than perfect credit scores – in fact, their entire business model is set up to help far more people with finance when they need it than a standard High Street bank or building society.
The best offers for you, no matter what your credit score, are available through LoanPrincess
LoanPrincess is a loan broker. We don’t actually lend you the money but we introduce you to the companies who are very happy to work with you.
How does LoanPrincess do this? First, you apply for a loan answering all the questions we ask of you. Our computer then quickly matches you with the lenders who we believe would want to offer a loan to you. How do we know which companies to pair you with? They tell us the type of borrowers they like to lend money to and we look for the closest matches based upon the information you give us.
A few seconds later, one or more of the lenders may come back with an offer. Our team will then sift through the approvals and then they suggest you with what Loan Princess believes is the best offer for you.
It all happens within seconds and, better still, only one credit search is carried out. Rather than applying directly to multiple lenders (remember that this can hurt your credit score), we do all the work and we save you time and money.
To get started, make your application by clicking here.